Cap-and-trade regulations are here: Time to choose the compliance level that meets your company's needs

Even though cap-and-trade legal limits on gas emissions are not yet happening at the federal level or in most states, California steadily marched toward a January 2012 launch of its program, which covers the electricity generation industry sector, covering about 360 companies at 600 facilities.  By 2015, enforcement in that state will extend to transportation, residential, and commercial fuels, which account for 85 percent of the state’s total carbon emissions.  It is clear that, over the next couple of years, California’s current actions will have far broader implications beyond state lines.  At a minimum, the California model will set a precedent in what is likely to be a continuing carbon emissions issue, and it will directly impact operations of suppliers of electricity into the state.

So, love ‘em or hate ‘em, legal limits on greenhouse gas emissions are an emerging business reality that many companies will likely have to manage.  Much like the experience of Europe in this area, the California model will feature a fixed cap with trading that gradually declines over years.   Eventually, this could have a material, financial impact on companies subject to the cap.  In short, it’s time for companies that will be subject to this new law to start getting ready.  From a risk management and business efficiency perspective, for example, it makes sense to develop an awareness and understanding of how emission regulations may expose your organization to pricing and other market risks, how it can impact your supply chain, and ultimately how it affects your resourcing, competitiveness, and bottom line.

In our work with clients, we are seeing three strategic approaches that companies can take now to get ready.  Each is distinguished by its level of compliance, and, subsequently, degree of overall responsiveness:

1-The first option can be described as basic compliance in which the company does just enough to satisfy requirements without making any major changes to operations.  This approach involves buying necessary allowances at prevailing market rates to cover anticipated emission levels.

2-The second approach is what we call enhanced compliance, because the company engages in forward-looking data analysis and scenario planning to identify carbon portfolio options that align with the organization’s business goals and risk appetite.  In other words, you don’t just comply, you create business value through strategic management of your carbon portfolio.

3-We call the third option beyond compliance, as it involves a holistic, ROI-based review of operations--and perhaps those of your supply chain partners--to explore ways to become more efficient and cut emissions and waste.  It employs the same type of data analysis found in option two, but drills deeper into how your organization and suppliers actually use energy and what the external market factors are, enabling you to identify more ways to add to your bottom line and to more effectively integrate compliance efforts throughout your organization.

When cap-and-trade starts to become a reality for your organization, the first step will be to understand how the new regulations affect your business and when.  Beyond that, it becomes a matter of some degree of choice.  Whatever direction you choose, we believe now is the time to start developing a data-gathering and reporting approach that aligns with the needs of your business.  Moreover, we believe that the three options described above offer an important strategic way of thinking about your compliance needs and options, rather than only a limited focus on compliance per se.  Companies that wait may find themselves spending increased amounts of money and resources later on; and early birds might just get an important leg up. 


Stephen Engler
Director
Deloitte & Touche LLP

Impact Investing - UN Women Gender Equality for Sustainable Business

As March marked "Women's History Month", the theme of the March 6^th UN Women and UN Global Compact Gender Equality for Sustainable Business event supported the assertion that women are key assets in combating poverty, building their communities and to advancing progress toward a sustainable world.

With the lead-up to the 2012 UN Conference on Sustainable Development (“Rio+20”), the concept of “Impact Investing” will be among the key drivers in leading business towards a sustainable development path.  Rio+20 will seek to build a global consensus towards greater environmental, social and economic sustainability, and that gender equality and women’s empowerment will be at the heart of sustainable development. Women's empowerment yields strong economic returns and is critical to achieving a wide range of development and societal objectives.

Deloitte and the member firms of Deloitte Touche Tohmatsu Limited (“DTTL”)^[1] are strong supporters of the UN Global Compact and efforts to advance the dialogue that business solutions are critical to making a sustainable future a reality.  However, without 'enabling frameworks' in place to facilitate comparison and evaluation of the social enterprises driving such business solutions, efforts will lack scale and consistency. Deloitte brings an informed perspective to this debate, given our leadership in advancing the impact investing infrastructure development and standardized approaches to measurement of the social impacts of business and how those impacts influence financial returns.

“Impact Investing” is an increasingly popular buzzword, given the growing interest of investors in gaining greater insight into the wider impact on society generated through investments.  With the multiple approaches to and definitions of Impact Investing, it was critical to frame the collective thinking around common definitions to facilitate the development of an asset class to scale and drive increased private sector capital into this space.

Impact Investing, as defined in the 2010 J.P. Morgan Report, Impact Investments – a new asset class, includes investing with the intention to create positive social or environmental impact alongside financial return. Impact investments are made around the world in mission driven for-profit social enterprises focusing on the base of the pyramid population, or traditionally underserved populations.  They target social and environmental issues, such as education, affordable housing, healthcare, clean water, and alternative energy, sectors that are traditionally underinvested due to conventional risk and return profile. 

The foundation of any industry is independent, credible standards for consistent measurement of performance. Deloitte assisted in the creation of the Impact Reporting and Investment Standards (IRIS), which provides a framework and common definitions for measuring social and environmental performance of impact investments. With this infrastructure, serving to bring order to the previously fragmented and inconsistent measurement practices, the Impact Investing industry has great potential to build an evidence base about the effectiveness of for-profit investment in addressing social and environmental challenges.  Deloitte’s work in this space, which also includes our role as a Pioneer Funder of the Global Impact Investing Ratings System (GIIRS), serves to advance our focus on assisting our clients in drawing linkages between company sustainability initiatives and investment in market-based solutions to scale sustainable economic development.


Kristen Sullivan
Partner
Deloitte & Touche LLP


^[1]As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries.  Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.  Certain services may not be available to attest clients under the rules and regulations of public accounting.  

Finding Business Opportunity in Supply Chain Sustainability

As I’ve discussed in this space before, there are great rewards to be found in the form of reduced costs and enhanced shareholder value by looking for incremental savings across all phases of your supply chain and those of your suppliers.  In addition, I also know that there are game-changing business opportunities available by thinking differently about operational efficiencies.  In other words, sustainability is not a constraint; it can actually serve as a driver of innovation and growth.

By looking at processes and end results through a sustainability lens, companies may start to see new approaches and benefits emerge.  For example, a consumer products company focused on designing a new concentrated detergent that would reduce carbon expenditure and process waste, also ended up producing a detergent that would work equally as well in cold water as hot, thereby adding the consumer benefit of reduced energy consumption.  Similarly, companies that make packaging materials have taken steps to reduce the resources that go into their products and to make the disposal of those materials more cost-effective and environmentally friendly.  An added benefit has been realized in the deliver/distribution phase of the supply chain: lighter, more compact packaging provides more containers of product to be shipped in the same size trucks.

This is what I call “total lifecycle thinking,” because as we carefully study and analyze each node along the supply chain we find new and better ways to make things that produce bonus benefits, often beyond the ones we were aiming for in the first place.  Sustainability is a value imperative that can lead to leaner manufacturing practices, higher quality through fewer defects, and flexibility in sourcing and processing that can enhance response to changes in demand.  But in order to achieve total lifecycle thinking, we must be open to new ideas and to greater collaboration with suppliers and consumers.

Rather than being a constraint, I believe supply chain sustainability can be quite liberating—in a very profitable way.



Sanjay Agarwal
Sustainability Leader, Operations and Supply Chain
Deloitte Consulting LLP

CDP Report 2011: Clear signs of growing awareness of critical water issues - and opportunities

Recent release of the CDP Water Disclosure Global Report for 2011¹ brings evidence that the dial has moved on how companies perceive water scarcity as a business risk.  Just since the 2010 report, a significantly larger number of companies recognize that water scarcity represents a very real business risk in the near term.  It is becoming clear that water is a resource issue many leading companies are feeling now, or that they expect to feel in an impactful way in the next few years.  Nearly 60% of CDP study respondents identify water as a substantial risk to their business, and one-third have already suffered some type of recent, water-related business impact.

In addition, another key finding in this year’s study was that almost two-thirds (63%) of respondents view water issues as an opportunity—for cost reductions associated with efficiency, to new revenue from water-related products or services, and for brand enhancement.  Further, 79% of those potential opportunities are expected to impact business in the next five years.

What is our take on these substantive shifts in business perspective?  First and foremost, this topic has transitioned from being one that is “interesting” to watch to one that is essential to understand and translate into constructive action.  We believe the 2011 findings show that business has entered a new phase in which water issues are viewed as having:

• Strategic business implications with associated risk
• Near-term impact—whether risk or business opportunity
• Potential for innovation in products (e.g., water treatment), services (e.g., data analytics), or relationships (e.g., water is a shared resource that requires collaborative stewardship efforts)

In particular, the study demonstrates that water can have value that goes well beyond its price.  For some companies, for example, it has reputational risk and corresponding brand value.  For others, it has regulatory risk, and, as such, should be managed as a compliance issue.

The study’s response rate alone demonstrates that water scarcity interest and concern is on the rise.  The CDP study seeks respondents from hundreds of the world’s leading companies, including those in the FTSE Global Equity Index Series (the Global 500).  The 2011 survey generated a higher response rate overall—increasing, for example, to 60% from 50% among the Global 500 as compared to respondents from that group in 2010. 

In summary, we are seeing the shift to a new paradigm in water management, where water is recognized as a strategic resource. Growing populations and increasing economic activity associated with declining water access and quality can lead to increased competition for water.  As is usually the case, the more everyone competes for a key resource, the greater its value.  We are proud to be part of CDP’s effort to increase awareness of the importance of water related risks and opportunities. We believe water will likely continue to be a factor in business success—even competitive advantage, survival—for a long time, and we’re working with concerned companies to transform their businesses accordingly. 

Will Sarni
Director
Deloitte Consulting LLP

¹CDP Water Disclosure Global Report 2011, Carbon Disclosure Project, www.cdproject.net.

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2011 Deloitte Development LLC. All rights reserved.

Member of Deloitte Touche Tohmatsu Limited

Interest grows in using data analysis to drive safety solutions

Intending to provide employees of a safe working environment is a top priority — and a social imperative — for any effective organization.  But it’s also an important economic driver: workers’ compensation claims and other direct costs related to on-the-job injuries totaled over $53 billion in the U.S. in 2008¹.

Increasingly, safety analytics plays a role in helping organizations advance employee and customer safety programs and bolster loss prevention efforts.  One recent piece of evidence to this effect was my invitation to speak to an American Society of Safety Engineers Conference (ASSE). ASSE is among the largest organizations of its kind, and we were gratified to see such great interest in connecting safety analytics with stepped-up safety processes among members of this respected group.

Why the connection?  Because specialists/experienced practitioners can see from lagging indicators on the claims side that there is a benefit to looking at leading indicators on the prevention side. Stated differently, what do we know before an accident happens that would help prevent the accident from happening in the first place?  I know from my work with our clients that visibility into analytics can help business managers make more defined, objective, and, ultimately, more economically favorable decisions.

This is achieved by applying data mining and statistical techniques to modeling of factors that can contribute to accidents and/or lessen the negative impact of an accident or injury. In addition to growing interest among ASSE members, consider steps insurance companies are taking with GPS-type tracking devices to look at driving patterns and other behavioral characteristics that might contribute to accidents.

Our message at the conference — and to all concerned companies — is straightforward: it’s about correlation, not causation. That is, predictive modeling techniques help to identify risk characteristics of a certain population, incorporate key external data to bring those insights into play, then help us correlate scores to a specific outcome. The analytics side brings the science needed to study underlying causes and contributing factors and combines that intelligence with areas of the operation that have high potential for risk. Using similar tools, injury management handling can be improved to help minimize business interruptions and absenteeism while providing positive support for healthier, more productive employees.

For one major retail company, we helped to identify a more precise way of spotting stores that had a high propensity for accidents.  Having this information enabled management to improve employee and customer safety programs and more effectively manage claims and treatment when accidents did occur. In fact, studies show that for each dollar spent on safety programs, $3 or more is saved!²  Most businesses depend on the health and safety of its workers to operate, and safety analytics can contribute to workforce sustainability by helping companies focus on the right issues and correlations. 

David Duden
Director
Actuarial, Risk & Analytics
Deloitte Consulting LLP

 

¹2010 Liberty Mutual Workplace Safety Index, Liberty Mutual Research Institute for Safety, 2010.
²Ibid.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

The supply chain as a value driver

I’ve talked to many business executives who start out with the assumption that sustainability initiatives are about constraints and increased costs.  In reality, applying the sustainability lens to core operations actually can yield fresh, new approaches and add value to the business.  In particular, I’ve seen cases where a wealth of value can be derived at virtually all stages of the business supply chain — upstream and downstream, through internal operational efficiency as well as greater efficiency on the part of your suppliers.

Our experience shows that there are four key supply chain inputs and outputs that are especially lucrative.  They are energy, carbon, other natural resources, and waste.  After all, sustainability is about effective resource management, and we have seen time and again where a review of the efficient use and/or treatment of these four ingredients and outputs can produce financial benefits for the enterprise.

You may wonder, why these four?  It’s simple: they are ever-present throughout the entire supply chain, and, therefore, can provide a proxy for operational efficiency.  In addition, most are relatively expensive because they are scarce or difficult to extract.  And waste, of course, is just plain useless output.  Still other resources, like water, increasingly bring other complexities to the equation that go beyond costs, such as “license to operate” issues.

By examining these four metrics closely—from one end of the supply chain to the other, we can reduce costs, produce savings in rapid cycles, and take all of these actions while incurring relatively low levels of risk.  In short, we can impact shareholder value!  Isn’t this what we might call a “win-win-win”? 

Sustainability is no longer only about being green or fulfilling compliance requirements; it can be a critical driver of incremental value across the supply chain.  Don’t leave money on the table by ignoring the possibilities of greater supply chain efficiency.

Sanjay Agarwal
Sustainability Leader, Operations and Supply Chain
Deloitte Consulting LLP

What's in a word?

The English language is a source of constant fascination for me. Particularly, when a younger generation changes the meaning of words; leaving their elders in a temporary state of befuddlement. Examples abound. Do you remember when “bad” became “good?” As in he or she is baaad! Most recently, my 12-year old son has taken to calling things that are good to the extreme, “sick.”

Words need not spring from the street to change, or at least evolve.

 
From the Deloitte US 2009 Corporate Responsibility Report:
“It’s possible that the most intriguing word of the still young 21st century is sustainability. Early on, a business that was considered sustainable was one that could be expected to endure and sustain itself because it had a viable business proposition that represented more than fleeting value in the marketplace. During the post Sarbanes-Oxley era, sustainability became popular in reference to internal controls that were necessary to stay in business. Then, over the last five years, the growing wave of emphasis on the environment has made sustainability synonymous with greening and consideration of the consequences or impact that our actions have for our communities and the planet now and for generations to come.”

Somewhat vexing is the continued ebb and flow between corporate responsibility (CR) and corporate social responsibility (CSR). They often describe what appears to be the same thing. Do they mean the same thing? We don’t think so.

Is it an accident that Deloitte has a CR Policy? Not a CSR Policy? Ever wonder why?

I think it’s because at Deloitte, CR is a business imperative with bottom-line impact.  Eliminating the social allows focus on CR as a strategic business direction that’s consistent with our values and culture, but ultimately as smart as it is good. 

However, many admired organizations still use CSR, even some folks within Deloitte. Don’t they get it or are we missing something?  What do you think?

Jack McFadden, Corporate Responsibility Communications Director, Deloitte Services LP

As used in this document, “Deloitte” means Deloitte Financial Advisory Services LLP and Deloitte & Touche LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.  Certain services may not be available to attest clients under the rules and regulations of public accounting.

The Value of Water

What is the value of water?  March 22^nd is World Water Day and a good time to reflect on this question.  

For most businesses, the price of water remains relatively inconsequential compared to other operating costs. The real value of water for business is tied to intangibles such as brand, reputation, license to operate, business continuity and as a driver for innovation.

But there is another aspect of the value of water for business -- arguably the most important aspect -- that is tied to the social dimension of water.

Currently, some 1.1 billion people lack access to clean water, and more than 2.5 billion people lack access to safe sanitation.  The implications of these statistics for a steepening scarcity curve are staggering, particularly as demand for water increases globally in many major sectors – industrial, agricultural and domestic.  The business implications are similar to the implications for society:  increased competition for water and a workforce that lacks access to a basic resource.

Based on innovative ideas presented at the Hult Global Case Challenge, solutions can be identified to help solve the water scarcity issue. I participated as a judge a few weeks ago in the second annual Hult International Business School Global Case Challenge (courtesy of Jack Russi and Cathy Benko from Deloitte).

The competition is focused on addressing the global clean water crisis in partnership with Water.org, an organization founded by Gary White and Matt Damon, and The Clinton Global Initiative (CGI). In competitions held in Boston, San Francisco, London, Dubai, and Shanghai, the international competition “crowd-sourced” innovative ideas from some of the world’s top students. The Hult Global Case Challenge, as a CGI member, has committed to working with fellow CGI members to solve one of the world’s most pressing resource issues.

The winners of each Regional competition will compete in the Global Final in New York City on April 30, 2011, co-hosted by the CGI. At the final event, the participating teams will present their refined solutions to a panel of executive judges. Water.org will receive a USD $1 million donation from Hult International Business School, which can be used to help see the winning team’s solution implemented.

The Hult competition draws attention to the alarming and indefensible lack of access to clean water and sanitation among many populations.  It is driven by a global business school competition, and social issues can no longer be artificially divorced from economic and environmental issues. (The cornerstone of sustainability is, in fact, the integration of economic, social and environmental risks and opportunities.) 

Based upon the passion, creativity and commitment of the students participating in the Hult Global Case Challenge, I am confident new pathways to solving the water scarcity challenge will be identified.

William Sarni
Director, Deloitte Consulting LLP

Will Sarni is a Director with Deloitte Consulting LLP and leads Enterprise Water Strategy for Deloitte Sustainability Consulting.  He is an internationally recognized thought leader on sustainability and is the author of the book, Corporate Water Strategies (Earthscan 2011).

Risk: In Business Project Management, it isn’t a game

For me, the word risk used to invoke images of the classic board game, where players competed for world domination by building armies and invading opponents’ territories.  Players would draw cards to divide the global regions, and then roll the dice when attacking and defending the game’s political borders.  Developing a strategy – such as fortifying your borders, forming alliances and avoiding being spread too thin – is an important element of the game.  For instance, knowing that Oceania is the safest continent to protect and that Europe is the most difficult (a lesson we learned from Kramer and Newman) can give you an advantage over the other players.   While the outcome of the game of Risk is largely dependent on luck – luck of the draw, roll of the dice, and playing your cards right - it is still important to have a good strategy.

Now, when I think about risk, I think about the risk management challenges my clients, and those my Deloitte colleagues, face every day.  I think about the uncertainty and complex problems organizations must overcome when conducting business and planning for the future. 

I moderated a Dbrief this month on the strategies related to large-scale capital project management and investment.  A recurring theme my colleagues (Charles Alsdorf, Glen Justis and Joe Messick) and I identified during the development of the Dbrief was the risks impacting capital planning.  Such risks include:

• Market Risks (e.g., volatile GDP, inflation, commodity pricing, rising interest rates)
• Climate Risks (e.g., global climate change, seasonal weather patterns)
• Regulatory and Policy Risks (e.g., federal budget uncertainties, political unrest, and changes to environmental, infrastructure, healthcare, education and tax policies, priorities and funding)
• Competitor Risks (e.g., actions and responses)
• Customer Risks (e.g., demand, willingness to pay, managing expectations)
• Technical Risks (e.g., effectiveness, reliability, new technologies, standard protocols, R&D)

As you can see, there is a lot for organizations to think about relevant to risk when planning large-scale capital expenditures.  Fortunately, Deloitte’s capabilities go beyond simply listing the risks an organization must account for.  Deloitte has an “army” of leaders, skilled practitioners, industry specialists and game changers focused on risk management strategies.  Deloitte has developed models and identified key attributes for organizations to manage their risks, including:

• Organization and Governance: Leadership, standards, policies and defined team roles
• Business Process: Scheduling, work flow, reporting, project controls, and quality assurance
• Communication: Documentation, report dissemination, feedback, KPIs, progress tracking

Risk management is only a single aspect to successful capital project management.  Benefit analysis, quantifying project robustness, modeling and simulation, portfolio optimization, funding and defining strategic value are other key factors to large-scale capital project management decision making - factors you’ll see outlined in our Dbrief.  Successful risk management can facilitate successful project execution.  And in business, risk is not a game.

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Marlene Motyka
Principal
Deloitte Financial Advisory Services LLP Power & Utilities Leader

As used in this document, “Deloitte” means Deloitte Financial Advisory Services LLP and Deloitte & Touche LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.  Certain services may not be available to attest clients under the rules and regulations of public accounting.

Planting Down Roofs

  
In the course of your day how often do you look up at the skyline? Food, water, and shelter are the three elements of basic survival, and yet we do not spend much time thinking about shelter. Unless we are without it, it’s broken, or we are on an architecture tour, we tend to ignore the rooftops that populate our lives. With a few notable exceptions, like the movement from thatch to tiles to prevent fire hazards in 1212, based on an edict by King John of England, the evolution of roof technology isn’t that exciting. Things are changing however, and it’s time to start looking up, and thinking green.

A green roof (i.e., vegetated roof or roof garden) is a roof with vegetation planted over a waterproofing membrane. In Europe, green roofs are already abundant, yet their popularity is just beginning to grow  in the United States — particularly in crowded urban settings and cities. In Washington D.C., universities, advocacy groups, Federal Agencies, and condominiums are installing green roofs. Chicago has built one for its city hall, Philadelphia has installed them on schools, and Los Angeles on restaurants. They offer many substantial environmental and economic benefits, including:

• Reduction in a building’s energy, heating and cooling costs
• Minimization of storm water runoff,  city sewer fees, and the urban heat island effect
• Filtration of pollutants and heavy metals from rain water and from ambient air, including CO₂
• Extension of the life of a building’s roof
• LEED credits

What do green roofs mean in relationship to Deloitte?  Recommending that our clients consider installing green roofs on buildings is one example of the many ways we can help our clients achieve their sustainability objectives.  Helping our clients reach their greening goals is one objective I keep in mind while developing and defining the Energy & Natural Resource Management service offerings, as part of the Sustainability & Climate Change IMO. I’m not suggesting that we literally get our hands dirty and plant gardens on top of our client’s roofs, but we should be talking to our clients about how to take advantage of the benefits. And while it may seem backwards, starting at the top, by greening their roof, may be a great foundation for the rest of their sustainability efforts.

 
Greg Aliff
U.S. Energy & Resources Leader
Deloitte LLP

A Midas touch - turning sustainability programs into gold

As I mentioned in my previous blog post, sustainability reporting is a growing trend with implications beyond just greening your workplace. It’s also about the pursuit of benefits from cost savings to meeting stakeholder expectations and more! A key lesson for many, long-term gains don’t need to come at the risk of short-term profits. 

What are some benefits of successfully implemented sustainability programs? 
Cost savings. Perhaps the most intuitively attractive benefit is cost and efficiency savings. However, for industries with high carbon intensity due to energy use, cutting waste of any kind is an economic imperative. The cost-saving know-how you gain through streamlining operations might present opportunities to turn your savings into new revenue streams.

Whoever figures out how to squeeze the most “bang” from their increasingly expensive resource “buck” will gain immediate advantage. Whether you start with energy, water, waste or raw materials, the metrics used to identify and reward savings, along with the systemic knowledge gained from tracking efficiency, may well illuminate new opportunities. Imagine if every product design not only had an accounting for its upfront value and cost, but also for the potential value and cost of any waste products and the future value of recycling its raw materials. The math might look a little different.

Competitive advantage. Sustainability and revenue growth need not be mutually exclusive. Traditional market factors such as brand image, price, value and production scale are impacting the environmental and social credentials of a given product. And in so doing, companies are establishing new market niches and upending traditional competitive logic. This bottom-up, supply and demand-based approach emerged from a combination of increased consumer awareness, greater public demand to understand the hidden (environmental) costs of products, and the realization that a product’s story can be just as important as its tangible qualities.

Accountability to shareholders. Investors are becoming a key driver of sustainability activities, establishing powerful groups and developing increasingly relevant measurements intended to persuade companies to disclose their triple bottom line risks and opportunities. Many institutional investors are demanding greater transparency and accounting for sustainability and climate change impacts. 

 

Indeed the competition is fierce in achieving listing on the Dow Jones Sustainability or FTSE4Good Indexes. While disclosure and reporting can win over some powerful investors, a more significant impact may be the initiation of a holistic approach to internal accounting. Once a company begins tracking environmental and social performance with the same degree of acumen reserved for its finances, it is expected that goals will become harder to renege on and progress will be more closely scrutinized. Sustainability reporting is under the microscope and the non-disclosure of material social and environmental progress within those reports could negatively impact an organization’s reputation.

Regulatory compliance. In the hopes of minimizing the potential impact on compliance with any new law, agile companies seek to position themselves ahead of new requirements, and collaborate with policymakers to ensure that their early or voluntary actions are recognized. Many companies appear to see a business case in beating the curve. A top-down regulatory approach often elicits a defensive reaction. But rather than consider shifting operations to another jurisdiction, some companies have found oversight to be a catalyst for innovation, learning to identify and design as much of the “waste” out of their operations as possible. The goal, then, becomes: How do I make this burden a competitive advantage?

A new mindset. The cross section of companies realizing early and increasing returns from their efforts in sustainability is diverse in industry, motives and execution. A key ingredient for success is an emphasis on building an organizational culture of accountability. For many companies that view sustainability as a secondary imperative compared with short-term financial performance, or for those that don’t sense a clear opportunity in their industry, it will take vision, commitment and leadership to motivate organization-wide change and innovation. Holistic, systems-based thinking is beginning to replace the assumptions that may incorrectly define sustainability as a trade-off or an add-on. Moving from an approach that treats the sustainability “suite” as a collection of risks to one that regards it as a toolbox of potential rewards takes time, but the most significant risks are those of inaction – a high cost in missed opportunities and stifled innovation.

Eric Hespenheide

Partner, Deloitte & Touche LLP

A profitable shade of green

 
Ready, set, go! More businesses are joining the race to redefine the corporate bottom line, including the U.S. SEC, global stock indexes and many businesses from around the world. It’s becoming increasingly apparent that linking the interests of businesses, governments and consumers around the world is merely one degree of separation away. The challenges of carbon emissions management and coping with a resource-constrained, highly competitive future are two of the key components that fuel the trajectory of corporate sustainability activities.

Changes that address the financial impacts of resources, growth, carbon, ecosystems and climate change are fully underway. Many large businesses are maintaining (or increasing) investments in sustainability despite the economic downturn. Aligning strategies, business practices, systems and public image has emerged as a business and strategic necessity. Businesses, lenders and investors are now focusing on the long-term social, environmental and business implications of their strategies and capital allocations.   

An accurate assessment of business risks, costs and opportunities is the cornerstone of any successful enterprise. But how do you accurately account for such items? The 21^st century has seen the advent of the triple bottom line which encompasses the environmental, social and fiscal value of corporate activities. Or, in the words of Amory Lovins, “We aren’t harnessing the full power of capitalism unless we start playing with a ‘full deck of capital' encompassing the material, financial, human and environmental varieties.” [1]

Whatever the motivation, be it the possibility of significant cost-cutting through efficiency gains, a desire to improve public relations, or the specter of government regulation, many companies are harvesting new and unexpected profits from their sustainability programs. For some, the waste products they had dismissed as a cost of business yielded a new product or revenue stream upon closer inspection. For others, public and investor scrutiny created a pressing business case to improve governance, controls and disclosure, reducing long-term risk exposure and potentially preempting regulation. For yet others, a commitment to reduce carbon intensity in-house led to lucrative innovations they could sell up and down their value chain.

There are inherent obstacles to any kind of systemic change as well as challenges in implementing new ideas even after the business case has been made. In addition, trends point to more government regulation, increasing stakeholder scrutiny, greater competition for resources, and skyrocketing global demand for energy. The issue of how to grow amidst myriad constraints is not going away. Perhaps more importantly, with a majority of executives polled by The Economist identifying senior management as having a key role in driving their companies’ sustainability efforts[2], confident and informed C-suite leadership appears essential to meeting these challenges.

Eric Hespenheide

Partner, Deloitte & Touche LLP

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[1] Michael S. Hopkins, What Executives Don’t Get About Sustainability (and Further Notes on the Profit Motive). MIT Sloan Management Review, Fall 2009 (October 1, 2009).

[2] Economist Intelligence Unit (2010), Managing for Sustainability; 54% of Sustainability, CSR and Financial executives identify leadership by senior management as key to their companies’ efforts.

Why IT really matters in executing sustainability programs

I wonder if any company has a really good handle on the wide range of policies, procedures, and processes, along with the many individual projects and programs, which relate to sustainability strategies, goals, and metrics. I’ve been asked if I could identify such a company. I’m still looking.

Do companies have good information regarding the results of their sustainability initiatives? Can they report with confidence measures of tangible and intangible benefits? Do they know if they have taken full advantage of tax incentives and rebates available to offset the costs of our sustainability initiatives? What’s been the actual ROI of abatement and mitigation investments? Do buildings with more natural light really improve productivity and morale, and lead to fewer employee sick days? Are there real impacts on productivity, recruiting or employee retention from sustainability programs?

In my experience, it is difficult to pull all the pieces of the sustainability puzzle together. Ask your executives. Ask your board members. Getting consistent, reliable information about sustainability investments, costs, and results is hard. I think it’s hard, in part, because sustainability initiatives are approached separately, sometimes being tacked on top of the business rather than embedding them into the business. The result is well-intentioned but disjointed efforts performed inside functional or geographic silos with hundreds – or even thousands – of isolated activities. This reality is why I am devoting my time, talent, and energy to “IT for Sustainability.” My focus is on frameworks and enabling technologies to help manage sustainability data and to improve the quality of information used to plan, manage, and report on sustainability programs. I believe there are significant impacts for information technology priorities, projects, and plans at least over the next several years.

Every company has to invest resources in sustainability related initiatives – whether or not they actually use the term “sustainability” or fully embrace the concepts of sustainability. This is just a fact of life in the current environment. So, why not do it in a way that creates more value and better manages risk? Decisions about what investments to make, and judgments about whether projects and programs are delivering the desired results, require reliable information. Monitoring of performance and enforcement of policies will require timely and accurate information. An information-driven approach to sustainability can give even the most complex organizations the power of discipline and the benefits of efficiency.

Making sustainability a central tenet in strategy and operations, rather than something bolted on top of existing business processes, will require new capabilities. No one seems to argue with this point. But when it comes to the question about the role of IT in managing sustainability, there is still much confusion and a lack of clarity. Some are rushing to buy new software tools. But few yet have well-thought out strategies and plans for managing sustainability data, or a roadmap for information technology changes to support sustainability. Even companies where sustainability is a strategic priority can fall into this trap. Some companies have invested in new carbon management software, for example, without first creating a holistic sustainability strategy for the enterprise.

I believe that when IT and business leaders take a moment to think things through, address the underlying needs, and together develop strategies and plans, they will seek integrated technology platforms for planning, monitoring, reporting, controls, risk monitoring, and performance management related to sustainability. Why? For starters, they won’t want a variety of new software tools deployed in different parts of the business. And who wouldn’t want a consistent measurement framework throughout the organization?

So how do we get the right conversations started about information technology and sustainability? IT departments have been involved in sustainability for years through “Green IT” initiatives that reduce energy consumption through data center and infrastructure optimization. This has been important and valuable work, producing tangible benefits. I believe it is time to focus on the broader role of IT in helping to execute sustainability strategies and achieve sustainability goals. To help expand the scope of the discussion, we need a new term that goes beyond IT’s energy saving efforts and encompasses IT’s support of sustainability programs, processes and performance throughout the enterprise. I suggest we use the phrase “IT for Sustainability” or ITFS to refer to this broader role. The use of “ITFS” here at Deloitte is inclusive, running the spectrum from our work on green IT to our assistance in automating sustainability reporting, from development of sustainability performance intelligence to more advanced enterprise sustainability analytics.

Without the right approach to information technology, companies will not be able access the relevant, accurate, and timely information they need to make informed decisions about their sustainability strategies. And as rising energy costs, evolving regulations, and increasing stakeholder expectations make sustainability measures even more important, organizations will need new and better information management capabilities to execute and monitor their sustainability strategies, programs, and projects. IT for Sustainability should organizations to measure, monitor, and report on their sustainability performance, allowing them to truly understand the impacts on financial and operational performance.

Lee Dittmar
Principal, Deloitte consulting LLP

2010 . . . the year of carbon management

Despite the less-than-stellar outcome of the COP15, there are still many reasons to be optimistic about the ongoing dialog about carbon management in 2010. Even without formal legislation in place, committed organizations still trudge forward, dedicated to reducing the carbon footprint of their operations before it becomes mandated. These companies believe their brand will benefit from being an early adopter, they will achieve a positive financial impact from increased energy efficiency, and they will accrue security benefits from decreasing their dependence on foreign oil. In addition to the “usual suspects” of companies in the CSR space, there’s a surprise newcomer to the party:  the United States government. In a bold effort to move the U.S. government from laggard to leader, President Obama issued Executive Order 13514 earlier this year, which requires the federal government to reduce its greenhouse gas (GHG) emissions by 28 percent. As the United States’ largest owner of property, this represents a huge undertaking, and everyone from sustainability consultants to carbon accounting software providers is scrambling to get their piece of the pie.

 

Furthermore, as of January 1, 2010, large emitters are now required to report on their emissions under the Environmental Protections Agency’s new reporting system. According to this ruling by the EPA, “suppliers of fossil fuels or industrial GHG’s, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHG emissions are required to submit annual reports to EPA.” Reporting will start in 2011 based on the data collected throughout 2010.

 

Even without executive orders or EPA rulings, more companies are beginning to measure their carbon usage. In the seven short years since the Carbon Disclosure Project’s first request to companies for information, the number of respondents has grown tenfold. As companies from all industries embrace the notion that “you can’t manage what you can’t measure,” software industry veterans and startups alike are moving into help them track their carbon emissions, a market that is “set to grow seven fold over the next two years,” according to Groom Energy Research.

 

However, while measuring and reporting on emissions is an important first step, it does nothing to actually help mitigate risk to the environment. In order to create a wholly sustainable enterprise, forward thinking companies must do far more than simply implement a carbon management software system. Armed with new emissions data, they must work to reduce their emissions when possible, and purchase offsets when they can’t. But given the uncertainty around a bill coming out of Washington and the recent instability of the carbon markets, companies hoping to buy their way through pending legislation might be out of luck. Forward thinking companies can differentiate themselves by their ability to make measurable reductions in GHG’s through building and energy efficiency, supply chain optimization, green IT, supplier management, and operational efficiency.

 

They can avoid the temptation of one-off, stand-alone software systems, and instead seek enterprise-wide business process and software solutions. And with the U.S. government’s efforts in 2010, there’s sure to be a case study or two from which we can all learn.

 

Daniel Gerding

Consultant, Deloitte Consulting LLP

 

Water: We can’t take it for granted any longer

Do you know what happens when you turn on the tap at your kitchen sink? Are you aware of the miles of pipes and infrastructure that treat and deliver each drop of water you use and then conveniently take it away once you’re done with it? Most Americans are completely unfamiliar with where their water comes from, what it takes to treat it to useable purity levels (for both domestic and industrial use), and just how scarce fresh water may soon become in certain parts of the globe. I think that’s going to change over the next decade.

Just to make the point, only 3% of the earth’s water is available as fresh water. While parts of the US and in other areas of the globe are facing record-breaking drought conditions, our water supply infrastructure is crumbling and requires major capital investment just to keep up with maintenance. Unprecedented levels of water scarcity plus more domestic and industrial demand for water equates to a potentially unsustainable level of global water consumption.

So what does this mean to businesses? It’s time to start thinking of water and uninterrupted access to it as a strategic issue.

Changing Economics
We don’t pay for water directly – we pay for the infrastructure to deliver it. What if that changed? What if, like purchasing mineral mining rights, businesses had to pay for access to water? What if that equated to having to pay even two cents more per gallon of water? Right now, the average cost of water is $0.002 per gallon. Any increase in this number would turn the economics of beverage manufacturing upside down, as for many other industries. (Did you know it takes about 920 gallons of water across the full lifecycle to make a pair of jeans?) As useable water becomes scarcer due to pollution and increased demand, it is entirely realistic to think that the economics of water and how we use it will change dramatically.

What we’ll see in the future
Going forward, we’ll see increased scrutiny of the use of water in the production and services across virtually all industries, but most significantly in energy, and consumer and industrial products. This will be not only from an operational efficiency standpoint but also for the sake of regulatory compliance or avoidance, and a means to avoid treatment costs. We’ll also see a longer-term perspective and emphasis put on water availability when companies select where to operate, and increased demand for public disclosure of water consumption¹. All of these require companies to have an intimate understanding of their direct and indirect water footprint, consider what sustainable levels of water consumption would be at a local level, assess any business continuity risks they may face if water were no longer available or were more expensive to obtain or treat, understand any growth constraints water scarcity may create, and place he concept of water supply into long term strategic planning efforts.

Designing a water strategy
Right now, there is an opportunity to reap benefits - both tangible and intangible - through early identification of water related risks and opportunities. This goes beyond being smart about facility location and strategic sourcing. A comprehensive water strategy reflects not only where water is going to be coming from, but also how to ensure that it remains unpolluted, it is withdrawn at a sustainable rate, and that the interests and concerns of regulators, employees, the financial markets, and local communities are addressed.

For example, to address water quality challenges and engage local stakeholders, a company may invest in local watershed conservation initiatives to help ensure a safe, clean, and reliable supply of water for both the company and the community. This creates an opportunity to engage local stakeholders and establish a partnership for the welfare of the local economy.

Pursuing a water strategy involves comparing the cost of action to the benefits derived from taking action, as well as the cost of inaction. To that end, companies should consider three core goals related to water:

• Move beyond basic regulatory compliance
• Ensure continued access to supplies of useable water at acceptable costs
• Maintain “license to operate” by responding to community needs and concerns

Unlike the impact of carbon dioxide and other greenhouse gases, which is something we can’t readily see or taste, and which some think is very far away from impacting our lifestyles, water is not only critical for our survival but also lubricates the global economy.

Water strategy is becoming a business imperative. Without deliberate planning and careful consideration of what sustainable water use really means, even moderate business consumers of water will be exposed to increased risk and will have lost a significant opportunity for competitive advantage.

And isn’t that what being a “wholly sustainable enterprise” is meant to avoid?

Lee Solomon
Manager
Deloitte Consulting LLP

¹ Hoekstra, A.Y., “Water Neutral: Reducing and Offsetting the Impacts of Water Footprints.” UNESCO-IHE Institute for Water Education. March 2008.

Where do we go from here?

After two weeks of heated debate (and not to mention two years of discussions after Bali), the Copenhagen Conference of the Parties has drawn to a close with the issuance of the “Copenhagen accord.”

This accord “takes note” of the need to hold temperature increases to 2 degrees Celsius (to be reviewed against 1.5 degrees Celsius in 2015) but doesn’t set targets for reduction of greenhouse gasses. 

With no reduction goals or incentives to become more carbon efficient, businesses worldwide will likely still be seeking additional clarity about how they can most effectively move forward in a carbon-constrained world. Moreover, the absence of concrete reduction targets, as well as the omission of any discussion of the future of the clean development mechanism, may slow progress toward a carbon price (the price of carbon in the European ETS has been in decline since last week, presumably at least in part because of this uncertainty).

On the other hand, commentators are questioning the ability of the United Nations to bring negotiations to a head in such an event. The requirement for unanimity does mean that the minorities—in some cases to individuals—can have a lot of control over the outcome of the conference. 

Steps that were taken include:

• The accord did contain a 2 degrees Celsius target.
• It engaged the United States and developing countries, including China and India, in the need to do something about their emissions.
• It brought tropical rain forests into the debate through the REDD+ mechanism.
• It set a goal of mobilizing a fund to help developing countries with adaptation.
• Political leaders—presidents, prime ministers—rather than environment ministers and negotiators were personally engaged.

So the process is still ongoing. That said, there seems to be a consensus among attendees on how the conference could have gone more smoothly:

• Direct the interim negotiating teams to get to solutions—consensus is that the key to success here is to get the political leadership engaged early rather than at the last minute.
• Restrict the size of teams. Consensus is that 6,000 is not a good negotiating group.
• Keep the “tourists,” NGOs, and other observers to a minimum in the negotiating area. Consensus is that they just added to the hysteria.

We’ll have to wait to see what emerges in the next few weeks to establish the international path, but, moving forward, we expect more political leadership and less reliance on an annual jamboree. In the short term, however, country-level legislation is what’s likely to drive the climate change agenda and have the biggest impact on business.

Nick Main
Deloitte Touche Tohmatsu (DTT) Global Leader,
Climate Change & Sustainability

Time is Running Out

It seems everyone at the COP15 negotiations found themselves on the wrong side of something yesterday. Protesters allegedly attempting to storm the Bella Center were met by police with tear gas. Delegates from Friends of the Earth International, locked out of the center due to continued rationing of entrance passes to NGOs, conducted a sit-in for several hours. Attendees who made it inside the Bella Center (including several representatives from Deloitte Touche Tohmatsu member firms) found themselves to some degree locked in; those who attempted to leave were told that if they did so they could not reenter. 

On the negotiations side, the mood was similarly cantankerous. Saudi Arabia and Brazil were locked on opposite sides of a debate over the inclusion of carbon capture and storage (CCS) and forestry, respectively, in the clean development mechanism. Developing nations raised their voices in opposition to the introduction of two new negotiating texts by Conference of Parties (COP) President Rasmussen, questioning whether these texts were based substantially enough on the drafts negotiated by COP delegates up to this point.

The task ahead for the next 48 hours—bringing apparently quite loose drafts that are still the object of much contention into a signable agreement, while maintaining the peace in and around the Bella Center—certainly seems daunting. Tempers are brittle as no one has had much sleep—negotiators once again worked until dawn, and police and protesters have been clashing by night as well as by day.  

The notions of trust and transparency are argued by many to be at stake. For instance, some have argued that the United Nations process cannot be considered transparent while increasing numbers of NGO observers are locked out of the Bella Center. Others, most notably the Chinese delegation, have argued that the introduction of the new texts by the COP president represents a breach of trust in the collaborative process. Days of meetings behind closed doors seem to have taken their toll—whatever the expediency afforded by a narrower, less public process, attendees seem to have lost faith in negotiations they cannot directly witness.

Could consensus yet be possible? Some believe that the presence of heads of state will allow a last-minute compromise to be struck, as has been the case in previous such negotiations. Nonetheless, a contingency plan is already being framed in the public dialogue. Yesterday, Al Gore called for the next COP (in Mexico City) to take place in six months rather than a year, to allow an agreement to be reached quickly … or at least attempted under far warmer conditions.

Nick Main
Deloitte Touche Tohmatsu (DTT) Global Leader,
Climate Change & Sustainability

Late Nights at the Bella Center

It’s crunch time in Copenhagen. Negotiators are working late into the night (no mean feat when the sun sets around 4:00 p.m.) to polish still-unwieldy and bracket-laden drafts into workable shape. They have until Friday morning to ready the drafts for the ministers and heads of state who will consider them. It remains unclear whether agreement must be reached during this frantic round of re-drafting, or whether scope will remain for the ministers themselves to reach an accord.

On one hand, pressure abounds to bring an agreement to fruition. The so-called “high-level segment” of formal negotiations kicked off yesterday with stern admonitions from United Nations (U.N.) Secretary-General Ban Ki-moon, Conference of Parties (COP) President Connie Hedegaard, and His Royal Highness Charles, the Prince of Wales, all of whom emphasized the need to reach agreement in some form here in Denmark.  In recent days, Japan, the European Union, and the United States have all promised billions of dollars in aid to assist greenhouse gas adaptation efforts in developing countries. 

On the other hand, though, the talks are rife with incendiary rhetoric and finger-pointing. German Environment Minister Norbert Roettgen called American positions on mitigation “protectionist” and declared that “the Chinese are not interested in a level playing field,” while Indian Environment Minister Jairam Ramesh opined that the Kyoto Protocol is “in intensive care.” The pressure on delegates and the host country was heightened when Ms Hedegaard stepped down as the president of the conference to make way for Danish Prime Minister Lars Lokke Rasmussen, who will be leading the negotiations as many heads of government arrive in Copenhagen.

Notwithstanding an intriguingly more optimistic mood yesterday (especially regarding issues such as deforestation, where a framework is rumored to be nearly hammered out), the continuing debate around fundamental questions has delegates’ blood pressure high.  Questions as to whether temperature rise should be limited to 1.5 or 2 degrees Celsius, or whether the Kyoto protocol should be superseded by a new agreement seem likely to be on the table until the very last moment.  This second point is problematic as the two streams of drafts—a Kyoto successor and a new agreement—will have to merge before anything can be signed.  When leaders of the larger economies arrive in the next two days, maybe there will be more order and urgency to reach an agreement on a variety of issues.

As negotiations headed late into the evening on Tuesday night, Deloitte Touche Tohmatsu member firm attendees and their clients came together for a dynamic evening of discussion and music hosted by Deloitte Denmark. A young leaders’ panel including Dr. Jeanne Chi Yun Ng, Director of Group Environmental Affairs for CLP Holdings Ltd, and Deloitte Southern Africa’s Duane Newman explored how governments can structure policy and funding decisions to bolster private entrepreneurship efforts. Commentators Mads Ovlison, Chairman of the Board of the U.N. Global Compact, and Greg Bourne, CEO of the World Wide Fund for Nature (WWF) Australia also made provocative remarks on the imperative for speedy and decisive action on sustainability for the business community.  Attendees were then treated to a program of world music commenting on the negotiations, wherein hectic instrumentation and vocals eventually resolved into a rendition of “All You Need Is Love” as sung by a children’s choir.  It was an inspiring representation of how order could be born out of a chaotic muddle—a hopeful message as COP15 draws closer to its end.

Nick Main
Deloitte Touche Tohmatsu (DTT) Global Leader,
Climate Change & Sustainability

Green IT: All Aboard the Green IT Train!

“All aboard the Green IT Train! 2 minutes until departure,” shouts the conductor.

I glance at my watch and begin thinking to myself. It wasn’t long ago when it seemed I couldn’t go a day without opening a major technology publication and read about how the world was going green and that every company’s information technology infrastructure was along for the ride. That’s when I bought my ticket to board this train, when the future of Green IT looked bright, and the ticket seemed like a great investment. Sadly, those days have passed. Or have they?

There’s no doubt that the recession has made it more difficult for companies to invest in making their IT green, but there are a few alternatives that companies seem to be investing in right now to make the economics a bit more realistic. In a recent Entrepreneur Magazine article titled “Future of Green IT: Greenbacking Green,” it was noted that data centers, server virtualization, hanging the layout of devices, and using more heat-resistant hardware can cut the number of servers needed and reduce cooling costs, allowing companies to reap a financial reward from greening their technology enterprise. Savings can also be found in offices and branches by turning off computers across the enterprise when not in use, consolidating printers, going paperless, and replacing PCs with "dumb" terminals that use 80 percent less power. 

As I grab a sandwich out of my bag and head toward the boarding area, I recall how the Obama administration has been aggressive in setting policy relating to greening energy use throughout the U.S. According to the Energy and Environment section on the White House web site, Obama and company will be investing over $11 billion in renewable energy sources, $5 billion in home weatherization projects and $600 million in green job training programs. This, in turn, should have a noticeable positive impact on the future of Green IT. Obama and company are definitely riding the Green IT Train and are planning to offer heavy incentives to subsidize the hefty fares required to get on board (another reason I bought my ticket). These incentives should lead to increased green investing by companies, including investment in Green IT. But then I wonder, will this green investing continue?

And that’s when it hits me. According to Forrester’s recently released 2009 Global Market Overview report for Green IT Services, the future of Green IT looks very bright indeed. While 2009 shows generally no change from 2008, Forrester expects green IT services to grow by 60% annually to reach $4.8 billion in 2013, from $450 million in 2008. I remember reading that figure and being shocked so I had to read it again: $4.8 billion in 2013, including factoring in the current downturn.

From the looks of things, the Green IT trend is here to stay. For the benefits to the ecology, let’s hope the trend continues to 2013 and beyond… despite how tough it may be to be optimistic right now. 

"All aboard!” the conductor shouts again. “Next stop: 2013. The Green IT Train departs momentarily.”

Brandon Reese
Manager, Deloitte & Touche LLP

Extreme Green Building Makeover

The upcoming decade will likely see massive investment in US buildings.  This movement is being fueled in part by the federal government’s focus on improving energy efficiency and increasing the development and deployment of renewable energy.  Industry is following suit, leveraging federal funding to create new technologies and build more sustainably, while capturing both cost savings and improving customer relations.  According to the Department of Energy, buildings consume 40% of primary energy in the US¹—making buildings the prime target for both government and industry programs.

Allocated funding associated with energy as part of the American Recovery and Reinvestment Act (ARRA) is $36.7 billion², and these monies will be multiplied by matching private investments.  Consider one program, the Weatherization Assistance Program (WAP), which over the last 32 years spent $5.6 billion weatherizing 6.2 million low income homes.³  With ARRA funding, WAP will receive $5 billion allowing the program to double its prior output in an accelerated timeline.⁴

So what will this movement do to our homes and offices where we live and work?

The changes will likely be considerable and broad-reaching since both new construction and existing buildings will be impacted. 

Smarter Buildings

Since the 1970s, the energy efficiency of most electrical equipment inside buildings has improved.  Everything from refrigerators to air conditioners has lower energy consumption at increased performance.  Although this trend will likely continue being led by both industry groups and government programs like EPA’s Energy Star, the next biggest opportunity for improvement will be in linking all of these energy consumers to each other and to the electrical generation and distribution system to create smarter buildings.

Smart building technology will allow building systems to react in real time to maintain comfort levels and services at minimum energy levels.  Going beyond programmable thermostats, building systems will be able to shut-down and restart entire circuits preventing losses from vampire loads and preventing appliances from operating during unoccupied periods.  Furthermore, integration with utility systems will also allow price discrimination to drive behavior as customers can choose whether or not to reduce energy use and cost.  Networking costs have significantly decreased, particularly with the advent of low cost wireless solutions, such as Zigbee, which are designed to minimize the installation material and labor costs that historically had adversely impacted retrofitting an existing facility.

Location, Location, Location

A slower change, but perhaps the largest, may be the location of buildings—or more accurately stated, the co-location of buildings.  The concept is old.  Create an integrated community where people can live, work, and play within walking distance.  Link these communities with efficient public transportation.  Location and site selection are primary elements of the US Green Building Council’s LEED certification programs including the recent creation of the LEED Neighborhoods standard.  As municipalities integrate LEED into building code and builders strive to meet customer demand for greener facilities, location will be a major driver in construction decision making.

The impact on our fuel consumption from reducing the amount of mileage driven by the average American could outweigh improvements in fuel efficiency, at a lower cost to consumers.  Every business is likely impacted by these sweeping changes, and not having a strategic plan or assuming business as usual could lead to lost opportunity.

Ali Ahmed
Deloitte Consulting LLP

1  Department of Energy, Energy Information Administration Annual Energy Outlook 2008
2 Department of Energy ARRA funding from DOE website http://www.energy.gov/recovery/index.htm
3 Weatherization Assistance Program Technical Assistance Center briefing book and website, http://www.waptac.org
4 “Weatherization Assistance Program – The American Recovery and Reinvestment Act of 2009” fact sheet from the Department of Energy

Green Supply Chain Metrics: Sifting through the clutter to measure green business performance

Today’s pressures on businesses to consider environmental impacts of operations and the proliferation of different methods of reporting on that impact to employees, customers, shareholders, governments and the general public can lead to confusion among sustainability practitioners about how to measure the “green” in their operations. Much has been written about the need for standardization of metrics and measurement systems across companies and industries. I don’t disagree with this need, but rather than belabor the point, I’d like to present an approach to understanding green metrics and, more importantly, designing a green supply chain metrics program that I believe is flexible enough to incorporate the needs of different stakeholders and robust enough to measure environmental impact in a way that management can use to drive operational improvements and cost reduction.

One of the biggest flaws with many green metrics programs is the focus on a select group of processes, instead of the business as a whole. Due to the asymmetry of information across the supply chain, most companies lack visibility into the environmental impact of either downstream or upstream participants. These are a couple of the major flaws that I believe could be reduced, and over time eliminated, with the use of a more consistent process for establishing green metrics.

Before embarking on the program, define the scope and goals of green metrics program by considering the who, what, when, where and why of the metrics. The answers to these questions are not typically easy to come by and require the appropriate research, interviews and due diligence to develop a clear picture of your company’s requirements for a green sourcing metrics program. The metrics program needs to be able to address both purely reporting needs, as well as managerial needs, which is the only way that the green metrics program will have potential cost and process improvement prospects.

The next step once the requirements are gathered and assessed is to understand the types of green metrics currently being measured, focusing on the people, processes and technologies involved. It’s important to understand how your current metrics align to the needs and requirements. It’s especially important to identify both gaps and overlaps between the desired state and the current state of green metrics to establish a flexible and comprehensive program.

Next, develop the strategy to achieve the desired green supply chain metrics program.  Again, it’s important here to consider the people, process and technology elements to the green sourcing program. Elements like ERP integration, frequency of reports and potential distribution channels for the reports need to be incorporated into the strategy or the final result will not likely achieve the desired goals.

Finally, it’s time to do the heavy lifting and implement the strategy. Like other large implementation projects, engaging the relevant stakeholders early and ensuring their cooperation throughout the process is essential to success. During this process, be sure to communicate the results of these efforts to supply chain partners so that they can provide any required pieces of information that are part of your company’s green metrics program.

By following the standardized process above, my belief is that over time, green metrics programs will become more similar as they are designed as a strategic response to the marketplace rather than a purely reactive measure designed to meet the requirements of regulatory bodies. Also, through the standardized process above, green metrics can be used to better understand and manage the environmental impact of the company to increase the likelihood that targets set in certain supply chain processes like sourcing or design are actually realized through the company’s operations. 

Jayanth Iyengar
Business Analyst, Deloitte Consulting LLP

Carbon and sustainability: Business won’t wait for governmental action

On September 16, we hosted Tim Profeta, director of Duke University's Nicholas Institute for Environmental Policy Solutions, to discuss carbon policy and markets with client leaders from the C&IP, Pharmaceutical, Telecommunications and nonprofit sectors.

Throughout the evening, two parallel diagnostics emerged:

• Business is moving ahead with sustainable measures and initiatives at an increased rate
• US carbon regulation is currently stalled and will not pass though the House until Health Care Reform has been finalized

From a carbon regulation perspective, the reform’s outcome is closely tied to the ongoing health care debate. Three alternative scenarios were discussed by the audience:

• Health Care reform quickly moves through Congress, leaving enough political capital to the Obama administration to push through another cornerstone reform such as cap and trade
• Health Care reform fails, leaving no opportunity for the administration to push through controversial legislation
• Health Care reform makes slow progress, shelving carbon regulation for a prolonged period

With the next round of international talks on carbon emissions set for later this year in Copenhagen, no US policy will have passed Congress in time and thus negotiations are expected to remain inconclusive. This will likely lead to international frustrations with the US reminiscent of the Kyoto accord negotiations.

In contrast, the business community is not waiting for federal regulations to invest in the topic. One leading retailer recently required that all its suppliers document sustainable practices so as to allow consumers and buyers to evaluate products based on their “green level”. This is leading to changes and the implementation of sustainability performance management across its 13,000 suppliers. The VP of a large food products company highlighted that his organization was expecting other vendors to follow in the footsteps of the world’s largest retailer and require their own set of green metrics.

Attendees highlighted that the business case for sustainability, not only as a cost saver but as an innovation tool is becoming the consensus in the business community and original sceptics are now defining approaches to sustainability. As a local example of such approach, the dinner was held at Taranta, winner of Boston’s Green Business Award for its innovative sustainable practices in the restaurant industry.

Vincent Barrailler
Deloitte Consulting LLP

World Business Council for Sustainable Development: Advancing the agenda at the intersection of commerce and climate change

Some of the leading sustainability thinking in the world is taking place in this modest facility outside Geneva, Switzerland - home to the World Business Council for Sustainable Development (WBCSD). During a recent visit, we had the opportunity to participate in a detailed briefing on the Council’s current and planned activities.

Not surprisingly, it is clear that global business has a significant role to play in addressing sustainability, energy, carbon and climate change issues. The WBCSD represents a global presence in facilitating the dialogue amongst major business and other stakeholders: governments, non-governmental organizations (NGOs), etc.

The briefing covered a wide range of initiatives, including clean water, energy efficiency in buildings, mobility, mining & materials and others. The efforts represent a broad range of topics, and one of the most interesting aspects of the work is the wide range of companies- large and small- who are active in supporting the Council on its activities.

A membership organization, the WBCSD relies on active participation and support. One of the most interesting aspects of the WBCSD is the collaboration on many of the topics. Among the benefits are engaging in the dialogue, sharing experiences and leading practices, and being a safe forum for advancement of the thinking on these important topics.

If you haven’t seen the good work going on there, check it out: www.wbcsd.org

Chris Park
Principal, Deloitte Consulting LLP

Defining Impact…And Changing How We Think About Investing - Part II

In 2007 the Global Impact Investment Network (GIIN) was formed, and one of their goals was to identify and address the challenges that were hindering growth in impact investing. An early attempt was made to reach agreement on what a set of common metrics that all organizations in the sector should be measuring. The result of this was a handful of indicators which, although a good starting point, more effectively served to illustrate the challenge ahead. Different areas of focus, operating models, geographies, and lack of available resources for measurement and evaluation all emerged as potential barriers to developing this common framework.

Recognizing the need for collaboration, the Rockefeller Foundation, Acumen Fund, and B Lab initiated the Impact Reporting and Investment Standards (IRIS) effort. The goal is to create a common framework for defining, tracking, and reporting the performance of impact capital. This newly-conceived IRIS initiative will build on these sector-specific efforts to create a common language that will allow comparison and communication across the breadth of organizations, which should form the basis for enabling infrastructure and lead to transparency and credibility. The IRIS effort is an ambitious undertaking - nothing quite like it has been attempted. To be truly effective, IRIS will require acceptance and adoption from a broad group of stakeholders, eventually including governmental organizations, global investors, and traditional lenders. To address this, the IRIS team designed a process that would focus on stakeholder engagement, starting with a core group of leaders in thought and practice in measurement in impact investing. The team then expanded their outreach to include additional groups of stakeholders, culminating in the launch of a Wiki site to collect feedback, a set of webinars, presentations and consultations at the Metrics from the Ground Up conference, hosted by the Grassroots Business Fund (GBF) and Aspen Network of Development Entrepreneurs (ANDE).

Engaging hundreds of individuals representing over 50 organizations should help ensure that the framework would be applicable across sectors, a balance between the desire for metrics from investors, and the resources available to provide this data at small investee organizations. With the feedback of these stakeholders incorporated, Version 1.0 of the IRIS Taxonomy is now completed and published to the IRIS website (www.iris-standards.org). Over the next few weeks, a small group of investors will begin pilot adoption of Version 1.0, modifying their current systems for measurement and working with investees to collect data sample data that will be aggregated to populate the database.

While the public release of this framework and its adoption marks an important step in the development of this taxonomy and infrastructure to collect and communicate data and develop benchmarks and ratings, IRIS and the tools that it supports are by no means complete. The taxonomy will evolve, grow, and improve over time. Subsequent versions are expected to expand to include a more comprehensive set of indicators and metrics applicable to traditional corporations, which are under a constant barrage from investors and stakeholders to report on and improve non-financial performance. The emergence of standardized measurement, reports and ratings systems should increase the credibility and transparency across all sectors. This should, in turn, attract capital from socially responsible investors and even traditional investors looking for growth markets with a positive impact. It will no longer be satisfactory for a corporation to meet investors’ expectations for financial returns. They’ll need to demonstrate positive social and environmental returns as well to be in the mix. It seems that impact investing is at a turning point and with a little push, it may change how the world thinks about investing.

Rob Whittier
Manager, Deloitte Consulting LLP

“Green” and the Public Trust

Investors, customers and top talent are raising expectations for companies’ responsibilities to society and the environment. In response to this heightened scrutiny, organizations must strategically manage their reputations for corporate social responsibility (CSR) to protect the corporate brand.

Increased regulations and attention to environmental issues have driven many companies to undertake sustainability initiatives, including greening operations, marketing of green products and encouraging sustainable behaviors among employees. I’ve seen companies that have successfully engaged in enterprise sustainability efforts realize significant benefits, such as:

• Increased recognition as an employer of choice, particularly for Gen Y talent
• Innovative opportunities to reduce costs throughout the organization and realize long-term benefits
• Improved employee engagement and productivity through increased morale and dedication to the organization
• Ability to make a positive impact on the environment while enhancing the organization’s internal and external brand

While I believe the potential benefits of sustainability efforts are clear and considerable, risk exists in their implementation and communication. Overpromising or overselling green practices, or “greenwashing,” can be damaging to corporate reputation and difficult to undo. Increasingly green-savvy stakeholders are keenly aware of the legitimacy of green claims. Blogs, indexes and guides inform and educate consumers about greenwashing.

The opposite of greenwashing is “greenmuting,” or the under-communication of sustainability activities. Greenmuting is a lost opportunity to build reputation and gain employee and public goodwill.

Poorly assessed communications can result in diminished public and employee trust. Organizations choosing to adopt green practices should manage against the risks of greenwashing and greenmuting while realizing the value and goodwill that can be created through sustainability efforts.

Katya Levitan-Reiner
Deloitte Consulting LLP

Defining Impact…And Changing How We Think About Investing

Around the globe, there has emerged a new force seeking to effect positive social and environmental change through investments in entrepreneurs and organizations of all sizes, from small vendors in developing nations to clean tech startups in Silicon Valley. Most familiar are microfinance lenders, who typically operate in developing nations and provide local entrepreneurs with the capital to start of grow small businesses, and through this increase the prosperity and economic health of their local communities. But this same impact can be exacted through a variety of models at much larger scale.

Need an example?

Visionspring is an organization started in India, which enables small companies to sell eyeglasses from carts or kiosks. To date, Visionspring has provided employment for over 800 entrepreneurs who have, in turn, sold close to  240,000 pairs of eyeglasses in their local communities; creating jobs, income and a sense of purpose for the entrepreneurs and addressing a clear social need. Building on this success, Visionspring has announced lofty goals: Facilitating 689,000 pairs of reading glasses sold during the five year period ending 2012, bringing material social and economic benefit to end customers, their families, and Channel Partners in developing countries, delivering a greater than 30X Social Return on Investment (SROI) in the form of extended working lives and increased productivity for customers of reading glasses, while creating and enhancing livelihoods for an estimated 5,200 local entrepreneurs.

A to Z Textile Mills, which started as a small company manufacturing mosquito bed nets in Africa, has grown to a capacity of 10 million nets per year. The obvious impact is helping to alleviate malaria in areas where A to Z distributes their product, but the impact of their operations, through the creation of over 3,200 jobs in their own operations, providing for over 20,000 individuals in their families and empowering local communities, may be far greater. This sort of mission has existed for some time, but the success of leading organizations in this space in parallel with the rise of corporate social responsibility and consumer awareness may have resulted in this new paradigm for investing for both financial return and social impact. A to Z’s impressive capacity is primarily due to new 50/50 joint venture with Tokyo based Sumitomo Chemicals, a multi-national company with over $30B in assets.

So what’s the challenge?

In the last few years, a proliferation of investment dollars has been allocated to funds and enterprises seeking to generate social and/or environmental impact, as well as a financial return. This impact-investing sector has grown to over $50B in total assets and new investment in the space grew by an average of over 35% over the past 5 years until the middle of 2008. In addition, close to 150 organizations are providing approximately $4B in capital and services to small and growing businesses in developing countries. And areas like clean tech and socially responsible investing have seen double-digit growth year over year, despite challenging economic conditions. Within the next 10 years, impact investing has the potential to grow to about 1% of total managed assets, which would result in about $500B of capital channeled toward social and environmental impact.

Taken together, these statistics suggest that there will be continued growth in this relatively new capital market.  The progress of this growth may be limited, however, by a lack of transparency and credibility in how funds define, track, and report on the social and environmental performance of their capital. Even in distinct sub-sectors, like agribusiness which commonly relies on the agricultural “co-op” as a way to benefit farmers though economies of scale and shared resources, many investors and intermediaries are tracking disparate metrics and using very different definitions for common ones, like acres organically farmed.  Imagine the financial markets if each publicly traded company reported different metrics, one chose to focus on cash flows and another on revenue, and investors and ratings agencies were left to interpret this to assess performance. We believe what’s missing in impact investing is a common language that will allow effective and comparable measurement and communication of financial, social, and environmental performance. This is an essential stepping stone that can help drive increased transparency, improved credibility, and the development of enabling infrastructure, which is required for new entrants to engage in and grow the marketplace.

Is there a solution?

Rob Whittier
Manager, Deloitte Consulting LLP

Celebrating Earth Day

How do you succeed in greening an organization? A company policy statement or memos explaining the whys and hows of sustainability are not enough. At Deloitte, sustainability and greening have started to become a movement. What have we done to achieve that? In my view, capturing our employees’ imagination was key for success. For example, we think of peppy ways to make “green” fun for everyone, such as the idea of “registering a green footprint,” that is, registering our employees’ energy-saving habits, starting from switching lights off when they leave the room, to printing documents double-sided, to using recycle bins.

The latest Deloitte event to foster a green culture was the Earth Day Event, hosted by practice offices throughout the United States. This year’s focus of our office was local, rather than global. It centered around home, garden, nature, and healthy eating, rather than climate change or pollution. Planning and organizing the event was a lot of fun for the Earth Day planning team, a group of ten dedicated employees led by a Greening Champion. The event was fairly inexpensive to implement, which could make it a worthwhile endeavor for many other companies, as well.

The Earth Day Event in our office was organized much like a trade show, with action stations in a large meeting room.

For example, there was a stand with produce from local vendors, names and addresses of local health food stores and healthy food snacks as give aways. Our information technology group presented new teleconferencing equipment, a great time- and cost-saving tool, and multi-purpose, energy-efficient office equipment, which will replace our traditional copy machines, printers, scanners, and fax machines. A slide show displayed the savings achieved by the past greening efforts of our office:  how much less paper we use by printing double-sided, how many personal digital assistants (PDAs) we recycled over the past year, how many disposable cups we are saving per month. Our creative employees made a video about proper recycling in the office - what paper goes in which bins, where do you dispose of soda cans and cell phones, etc.

To make it more interesting, we also had several outside organizations and consultants participate in the event and explain how their products and services are helping the environment:

• A home improvement store showcased energy-saving products, such as low-flow shower heads and energy saving light bulbs, organic cleaning products, and eco-friendly paints. The store manager was present to discuss and demonstrate the products’ features.

• Greening your home from the ground up: A local builder was available to talk about energy-saving ways to refurbish a home and explain the cost  benefit analysis one should complete when assessing which building materials or window designs to use
• A volunteer from a local nature center shared information about water preservation, organic lawns and gardens, the benefits of composting, and how to get started
• An Energy Commission Representative of our community was available to discuss home energy audits and the use of alternative energy

My personal favorite: A recycling station had been set up by an athletic shoe manufacturer, and employees could bring their old sneakers for recycling - a cool idea. Athletic shoes collected through this company's athletic shoe recycling program are processed into materials and used as padding under hardwood basketball floors or in new shoes.

It takes time and effort to change a company’s culture and motivate employees to “think green” and “act green.” With creative events such as the Earth Day Event, a company can start a wave that catches on and serves as sustainability catalyst.

I almost forgot: Sustainability and “greening” sometimes means that one has to be careful… so we refrained from printing colorful posters to promote our Earth Day Event.

Maria Davis
Partner, Deloitte & Touche LLP

Flexibility is Green too!!!

Whether or not companies believe in sustainability, they sure believe in saving money, and they need look no further than commercial real estate. Soaring real estate and energy costs are impacting businesses and they should be looking for opportunities to reduce their operating expenses by better managing real estate portfolios and energy consumption.
 
Residential real estate is going through a correction from the “irrational exuberance” of the mid-2000s, and the market is soft. While commercial real estate rents have dropped in recent years, commercial real estate has not had the same level of foreclosures as residential real estate – the importance of this is that real estate costs are usually the second or third largest spend for most companies. 

Corporate real estate is a significant asset, productivity variable, and cost for many large companies, but most of them aren’t applying the level of rigor and analytics that they devote to other parts of their business. As a result, many companies have large, under-utilized portfolios of office spaces. As one of my colleagues put it, “In many offices you can shoot cannon balls and not hit anyone.” Advances in mobile technology and process automation of most transactional tasks have changed workforce behavior and work processes, but space planning hasn’t caught up. Offices today are built just as they were in the 1950s. Additionally, most companies have re-aligned their headcount due to the slowdown in the economy and are consequently having to deal with excess real estate capacity.

Under-utilized spaces are a huge burden on a company’s bottom line and environmental footprint. Did you know that, based on U.S. Energy Information Administration data, buildings account for 39% of U.S. energy consumption, which is more than our cars consume? The U.S. Energy Information Administration also reports that buildings consume the largest share of total energy consumed and produce the majority of greenhouse gas emissions.

Why would any company want to invest in an under-utilized asset that pollutes, drains energy, and is expensive to operate?  In my experience, real estate is often an afterthought. I’ve seen space projections off by 100% more than once. Too many managers just don’t consider flexibility in leases and space management strategies as they grow and contract. 

Given the uncertainty and unpredictability in today’s business climate, why not make accommodations for more flexibility in real estate planning and mitigate a huge financial risk?  The goal should be to decouple headcount (demand) and office space (supply). Done right, companies can save themselves a lot of money - and the environment, as well. Green is for dollars, too.

Sundar Nagarajan
Senior Manager, Deloitte Consulting LLP

Green Innovation Begins With Each Of Us

Green innovation is here to stay.  It is a growing focus of consumer advocacy, it is a cornerstone of the new administration’s innovation strategy and it makes increasing sense for a variety of businesses.

While much attention is being paid to high tech frontiers such as non-polluting energy sources and smart power grids, I believe the “final frontier” is each of us.  What I mean is that our behavior, and our ability to learn in order to change it, is fundamental to our sustainable future.  No amount of high tech innovation on the supply side can transform the energy equation if the demand side that is made up of millions of behavioral “moments of truth” every day does not transform as radically. 

I raise this point based on what I learned in one of my previous careers - medicine.  When I was in medical school in the late 70’s, expenditures on health care hovered around 10%. And that seemed like an unsustainable rate of expenditure and growth. Now we are tracking at 17% of GDP, and on course to rise to 20% by the year 2017. 

The problem was not innovation on the supply side.  Scientific advances coupled with entrepreneurial business motives led to ever more technologically inventive (and expensive) curative technologies.  However, the focus on more effective technology has trumped the demand side of investing in healthy behaviors; our health care costs are burdened by simple, but highly costly, human challenges.  For example, I quickly learned as a young physician-in-training that one of my most significant challenges was compliance.  Simply put, a large percentage of patients didn’t take their medications properly.  No medications, no cure.  Other challenges had to do with the lack of methods (and time) to teach patients so they could become active collaborators in maintaining their health.

Health care has begun to confront what the green movement must, namely that designing for human beings – taking into account their needs and the nuances of their behavior - is critical to successful outcomes.  And this is hard (as designers know) because the most important human needs and motivations are often tacit, that is they are often teased out only by someone with the observational skills of an ethnographer able make inferences about what is needed.  The knowledge that counts often does not emerge through focus groups, questionnaires or the typical methods of marketers.  So, user centered design, design driven by the real-world needs and motivations of users is key.

This line of discussion leads to interesting questions.  What is a green lifestyle?  What is a green living environment?  What is a green workspace?  How do we piece together the hundreds of energy and sustainability related decisions we make each day, often in a completely unconscious manner, into a new kind of sustainable lifestyle?  How does that lifestyle vary in terms of culture and social variables?   How do we encourage people towards a sustainable lifestyle by enabling them to learn about the consequences of their choices?  Supply chain experts are dreaming of the day when we can scan a barcode on a product in a supermarket to find out the provenance of a chicken or a peach – whether grown sustainability, in what location and processed by whom, etc. The same logic could apply to our energy behavior – the carbon footprint of a particular choice, the energy source, the tradeoffs, etc.

User experience will be key to making the sustainable lifestyle a reality.  My desk is piled with business plans from “energy dashboard” ventures that are trying to give average citizens a sense of the consequences of their decisions.  At present, our decisions are made in a vacuum – we need to provide them with context, and the kind of context available at our fingertips.  We need to enable everyone to be an expert and push knowledge down to the lowest and most immediate level of use.  Imagine the metaphor of citizen as sustainability professional and think about how it might be realized.

Design is the “secret sauce” to a sustainable lifestyle because the final frontier is the intractability of human behavior.  I remember working at a local VA hospital as a medical student and seeing patients who had had radical throat surgery for cancer smoke their (unfiltered) cigarettes through a hole in their tracheotomy tubes.  Most cardiac patients can’t change their behavior even when they know that is the only thing that will prolong their life.  We don’t change even when we know it will be good for us and only education, user insight and smart design will make the difference. 

This is a core challenge we are up against and why I say that green innovation ultimately must begin with – and in - each one of us.

John Kao
Chairman, Institute for Large Scale Innovation

Cap and Trade Carbon Markets

“The energy sources that we have today are changing our climate and the environment catastrophically and irreparably.” This comment in my Saturday morning paper from Mike Lazaridis, President and CEO of Research in Motion, got me thinking again about the drivers we need in order to incentivize investment in low emitting sources of generation. The carbon cap and trade programs currently being considered in the United States would create such a driver - by putting a price on carbon.

You may ask how a cap and trade program puts a price on carbon. Although the details and implementation are very complex, the principle is straightforward. The government would put a cap on emissions by allocating or auctioning a fixed number of allowances, which gives the owner the right to emit one tonne of greenhouse gas. Companies with low cost opportunities to reduce emissions will do so, making more allowances available to companies with fewer options to reduce. The carbon price will emerge as the marginal cost of making the most expensive reduction needed to satisfy the cap. The cap and trade programs being discussed include most high emitting industry sectors, such as fossil fired electricity generation, oil and gas production and transportation, cement production, and ceramics manufacturing.

Most schemes also provide for “offset projects,” which must be outside the capped sectors, thereby reducing emissions below their “business as usual” emissions level. The project owner receives emission reduction credits, which can be sold into the cap and trade market. These offset credits can often be developed at lower cost than mitigating emissions within the cap and trade sector, so they are an important cost control.

One regional cap and trade scheme is already operating within the United States, the Regional Greenhouse Gas Initiative (RGGI), which includes electricity generation in 10 northeast states. I’m most excited about the Western Climate Initiative because it is broader in scope, with nearly 90% of emitting sources included. It also covers a broad geography, including seven western states and four Canadian provinces. Driven in part by regulation being developed in California, this market serves as a thought incubator for the rest of North America.

To be truly effective, to create a level playing field for our industries and consumers, I believe a carbon cap and trade scheme really needs to be federal.  During his campaign President Obama committed to such a national carbon market, and he has taken important steps to support its development. In his first speech to Congress, Obama said:

“To truly transform our economy, to protect our security, and to save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy … So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. That's what we need."

Congress is responding. On March 31, Senators Waxman and Markey released their draft bill “American Clean Energy and Security Act of 2009,” which would regulate industries responsible for 85% of United States emissions. Waxman and Markey hope to have the bill through committee by Memorial Day 2009 – an aggressive schedule.

Cap and trade schemes will undoubtedly have significant business implications for emitting industries, energy consumers, and the American public. At Deloitte we’ve given a lot of thought to these consequences, and you can read about them in our white paper – “Confronting the Carbon Challenge.” Perhaps these business implications are necessary, and unavoidable, if we are to make the transition to a low carbon economy and avoid potential catastrophic consequences
Let me know what you think about the emerging carbon markets.

Pat Concessi
Leader - Climate Change and Sustainable Resources, Deloitte Touche Tohmatsu

Recognize Our Unique Place in Time

The sustainability, energy and climate imperative

You may argue about how we’ll get there or have opinions about what we should or shouldn’t do to get there. But there is no denying that we are in the midst of what may be the most fundamental change in business and the global economy since the Industrial Revolution. What author Tom Friedman has called the “Energy-Climate Era” may drive more innovation and disruption than the Industrial Revolution and the Internet did in their times. Are you in the mix?

We are moving into an era when the environmental and social impacts of global commerce must be – and will be - measurable, manageable, visible, and valued.

Everyone benefits in a world where economic outputs are fully indexed for their relative effect on environmental and social impacts. It’s an easy strategic choice - even though it may mean substantial disruption to and potential failure of large sectors of the existing economy. While some organizations may utterly fail in an age of environmental and social accountability, others may thrive.

Three things to consider:

1. Historical conflicts amongst economic systems will evolve differently as energy, climate, and resource impacts come into play. In his book Plan B 3.0, legendary environmentalist Lester Brown quotes former vice president of Exxon for Norway and the North Sea Oystein Dahle as observing: “Capitalism may collapse because it does not allow the market to tell the ecological truth.” Simultaneously addressing risks and opportunities posed by energy, climate, and resource issues will require structural changes in how businesses operate, and those that can build economic success while accounting for externalities will thrive. For democratic capitalism to emerge as the leading (or sole) political/economic system, its component parts must embrace economic performance indexed to related environmental and social inputs and impacts.
2. The entire approach to measuring performance must evolve to account for the social and environmental impacts related to a given set of economic outputs. However, we are still in the infancy of our collective ability to measure social and environmental impacts with the same rigor and transparency with which we measure financial ones. We’ve spent decades developing methods, policies, tools, infrastructure, regulations, and systems to manage, report, and compare financial performance; we don’t do it perfectly, but we do it far better than we measure environmental and social performance. The development and widespread adoption of metrics for environmental and social performance is the next wave of change - affecting everything an organization does over time – and there will be clear winners and losers in this disruptive change.
3. We are past the tipping point; we are in the soup. Governments, businesses, foundations, NGOs, consumers, trade associations -- virtually every entity whose members have a common interest in energy, climate, and resource issues is striving to address those issues in ways that are most beneficial to them. And although these groups may be driven by self-interest – and even though those interests may be disparate or even contradictory – the net-net is that we’ll all be better off when global economic growth is driven with full accountability for the related social and environmental impacts.

Whatever your personal belief about climate change, coal vs. solar power, corn for food rather than ethanol, the power of government vs. big business, or any other of today’s ”hot” sustainability topics, how we answer each of those questions matters less than the fact that the dialogue is happening at all—forcing us to rethink, for the better, our collective definition of economic success. The value is in the debate. Jump in, and don’t worry for now about being right or wrong - worry about missing the boat entirely.

Chris Park
Principal, Deloitte Consulting LLP

Three Myths About Green Sourcing of Indirect Materials

As business leaders try to understand how to “green” their supply chain, sourcing professionals are being asked to show how they’re contributing to the company’s overall sustainability goals. Much of the focus in “green sourcing” has been related to direct materials, those items used in the products or services being sold to a company’s customers. What’s often overlooked is the large potential in indirect spend categories that are consumed internally in the operations of the business.

Since most indirect spend categories are invisible to customers, and typically smaller than direct spend categories, executives tend not to pay as much attention to them. As a result, opportunities in indirect spend are not as clearly understood. To capitalize on the potential of “greening” your company’s indirect spend categories, let’s explode a few myths.

Myth No. 1: Greening indirect spend categories means buying more expensive items.

Actually, greening indirect spend categories can save you money.

Since many indirect spend categories are overhead or SG&A (selling, general, and administrative) costs, the benefits of greening these categories seem dubious because unlike direct materials, the potential increased cost of “greener” inputs can’t be translated into a premium price for the final product, with the associated marketing and PR benefits. However, in many indirect spend categories, large savings potential exists once the sourcing team is able to quantify all costs associated with a particular category, beyond just initial purchase price.

For example, equipment categories like HVAC, refrigeration, and food preparation equipment all consume a lot of power. In some cases, the total electricity costs over the average life of the equipment exceed the purchase price of the equipment itself! In addition to electricity, durability and end-of-life retirement, costs can vary substantially among manufacturers. 

So don’t assume “greener” products cost more than their traditional equivalents just because their purchase prices are higher. With a little analysis, the higher cost of energy-efficient equipment can be justified. In a recent project where I looked at a company’s spend on refrigeration equipment, I found that for every extra dollar they spent on the most energy efficient equipment, they actually saved three dollars over the life of the equipment. 

Myth No. 2:  Product specifications offer the most greening benefits.

On the contrary, performance specs offer the greatest benefits for uncovering sourcing opportunities.

In many indirect spend categories, category specifications often are tied into a particular manufacturer or brand offering. They’re designed to help the product’s users understand the particular nuances of that manufacturer’s product and exploit its efficiencies.

While this might be helpful to the user, it’s important that the sourcing organization develop performance-based specs for all categories with green potential. This is perhaps the only way that the sourcing organization can consistently cut costs and improve sustainability in categories that are sourced repeatedly. Many technologies that reduce energy or water consumption, such as LED lighting or metering, have performance differences from manufacturer to manufacturer, just like any other product.

If the spec for a particular category is tied to a manufacturer’s offering, you won’t be able to capitalize on improvements from competing offerings if those products aren’t “in-scope” in the category spec. It can often be as simple as specifying that LED lighting is required, rather than Brand X LED lighting, in an RFP or other sourcing document. This allows participants to propose all market offerings, including those that are better than the industry standard. 

Myth No. 3:  Greening indirect spend categories follows the same process as traditional strategic indirect sourcing.

Not exactly. It’s actually more work to green indirect spend categories. But the payoff can also be bigger.

Green sourcing has some qualities that distinguish it from traditional sourcing. The main differences are in quantifying the opportunity and current spend, vendor development, and final analysis and implementation. 

In order to characterize and quantify the sourcing opportunity for a given category in a green sourcing process, you’ll need to assess all costs and engage a broader group of stakeholders than you ordinarily would. The sourcing team will need to talk to such groups as engineering, design, sales, finance, and perhaps others to build a broad view of what “greening” opportunities exist in a given category, in addition to the team’s own independent market research.

Likewise, vendor development will take a broader approach. In addition to the traditional industry leaders, you’ll need to look at (as appropriate) global and local vendors who have focused on building efficient and “green” products.

Finally, analysis procedures and payback periods in green sourcing are typically longer than in traditional sourcing. In many cases, you might need analytical models and spreadsheet or data base organizational tools, and other software programs in order to capture the full benefit of the sourcing process. Also, you’ll need to understand the potential benefits in terms of total cost of ownership, which might have a longer payback period than normal. This is especially true with equipment categories, as noted above. 

I believe that when sourcing teams focus on the realities of green indirect sourcing and the large benefits it can deliver, they can achieve breakthrough results for themselves and for their businesses.

Jayanth Iyengar is a Business Analyst in Deloitte Consulting LLP’s Strategy & Operations practice.